Banks want tax sops for core sector projects back

NEW DELHI: Banks are likely to push for restoration of income tax sops withdrawn in this year's budget to encourage investment in infrastructure. This includes restoration of Section 10(23)G of the Income-Tax Act under which banks had an exemption on their interest income for financing infrastructure projects.

In fact, banking sources say that the two issue will figure prominently in the pre-Budget discussions of the banking community with the RBI and finance ministry.

The issue is critical as the government has pegged a $320-billion bill over the next decade — estimated by Prime Minister Manmohan Singh to finance infrastructure projects. However, as of now, domestic banks barely finance 7.5% of the estimate, as on March 31, '06.

The share of infrastructure lending as a part of total bank credit to industry stood at only 20% at Rs 1,08,787 crore in March 2006. While lending to the power sector shaves off more than 50% of the amount, the rest is divided almost equally among telecommunications, roads and ports. This is, however, a substantial increase from the situation a decade ago. For instance, in 1998, infrastructure lending was just Rs 3,163 crore, or 2%, of the total annual bank credit extended to industry.

The banking community says that the unavailability of refinance at a reasonable cost and removal of tax exemption to infrastructure companies under Section 23(G) of the Income-Tax Act, is likely to become a serious problem over the next two years. "The RBI and the government are being sounded by the banking community of the unviability of infrastructure projects due to the removal of Section 23(G) and expensive refinance," a top official at a public sector bank said.

"With such a massive requirement for infrastructure lending in the next five years, banks will have no other recourse but to raise money overseas to be able to meet credit demand," Standard Chartered Bank's Bala Swaminathan told ET.